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Prefatory Note
The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the best-preserved paper copies, scanning those copies,1 and then making the scanned versions text-searchable.2 Though a stringent quality assurance process was employed, some imperfections may remain.
Please note that this document may contain occasional gaps in the text. These gaps are the result of a redaction process that removed information obtained on a confidential basis. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.
1 In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing). 2 A two-step process was used. An advanced optimal character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.
CONFIDENTIAL (FR)
July 12, 1978
SUMMARY AND OUTLOOK
By the StaffBoard of Governors
of the Federal Reserve System
SUMMARY AND OUTLOOK
I - 1
DOMESTIC NONFINANCIAL DEVELOPMENTS
Summary. Economic activity has continued to expand, although--
as expected--at a more moderate pace than during early spring. Demand
for workers remained strong in June, but mainly in the service groups
and in construction. Autos have been selling at a brisk pace, reflec-
ting in part buying in anticipation of future price increases. Food
price increases have been a major factor in the rapid acceleration of
over-all inflation this year, but prices for nonfood items also have
been moving up more rapidly.
Total employment rose substantially further in June, and the
unemployment rate moved down 0.4 percentage point to 5.7 per cent
About half of the over-all decline in joblessness reflected a sharp
reduction in the volatile teenage category, but there was a further
significant drop for more experienced groups of workers as well. Since
last December, nonfarm payroll employment has risen sharply--by 2.3
million--and the over-all unemployment rate has fallen 0.7 percentage
point.
Following sizable gains earlier in the year, manufacturing
employment increased little in May and was about unchanged in June.
As a result of these and other developments, industrial production is
tentatively estimated to have increased between 1/4 and 1/2 percentage
point in June, with gains evenly spread among products and materials.
Auto assemblies were lower than in April and May but there was an off-
setting rise in truck output.
I - 2
The large gains in employment this year have boosted
income growth and provided support for consumer spending. Sales of
new autos in June continued close to a 12 million unit annual rate
for the fourth month in a row. Retail sales other than autos leveled
out in June after substantial increases during the preceding four months.
While business inventories have risen rapidly in recent months,
these increases generally have not outstripped the rapid pace of sales.
In manufacturing, the book value of stocks grew at more than a $20 bil-
lion annual rate in April and May, well above the first-quarter average
rise, with rising prices contributing to these nominal increases. While
ratios of inventories to sales generally remain low, some inventory
buildup may be indicated in retail at furniture and appliance stores,
where such ratios have now moved above their 1974 peaks.
Outlays for producer durable goods and nonresidential con-
struction increased considerably during the spring, following the
weather depressed first quarter. While new orders for nondefense
capital goods and nonresidential construction contracts rose sharply
in May, the increase since the first of the year has been below the
1977 pace. This suggests a more moderate expansion of business
fixed investment for the remainder of the year. Residential con-
struction remained at a high level in May. Total private housing
starts were at a 2.08 million unit annual rate--only slightly below
the advanced pace of late 1977.
I - 3
A substantial pick-up in construction outlays has boosted
recent State and local government spending. In addition, hiring in
this sector has remained brisk, despite the fact that the Federally-
funded public service jobs program reached its employment goal by
late spring. The Administration's estimate of fiscal year 1978 Federal
outlays has been reduced by $2 billion to $452 billion; mainly as a
result of smaller than expected spending for the Commodity Credit Cor-
poration and defense programs. Revenues are still estimated at $401
billion for FY 1978, and the Administration is now projecting a $51
billion deficit.
Retail prices increased sharply again in May. Along with a
sharp rise in food prices for the fifth consecutive month, there were
sizable increases in housing and energy costs. Since the first of the
year, over-all consumer prices have climbed at a 10-1/4 per cent annual
rate; excluding food and energy,prices have climbed at an 8-1/2 per cent
rate. Furthermore, the June report on producer prices suggests little
relief in the near term. Prices for processed consumer foods at the
producer level rose more than 1 per cent in June, and the index for
crude food and feed prices was up almost 2 per cent. The rise in pro-
ducer prices for nonfood consumer finished goods did slow in June,
primarily due to smaller increases for passenger cars. But with truck
prices again higher, capital equipment prices registered another large
increase.
I - 4
Outlook. Recent data on economic activity have generally
been consistent with earlier expectations, and the staff estimate of
a real GNP increase at about an 8-3/4 per cent annual rate in the
second quarter remains unchanged. Inflation has continued at a high
rate, and the fixed-weighted price index for gross business product
now appears to have risen at a 9-3/4 per cent annual rate, up a bit
from last month's estimate.
The fiscal and monetary policy assumptions underlying the
projection have been altered somewhat this month. The staff continues
to assume that a $19 billion tax cut will take effect at the beginning
of calendar year 1973 with about two-thirds of the reductions accruing
to individuals. However, anticipating further spending shortfalls,
the staff has reduced its estimates of Federal outlays by about $3
billion in FY 1978 and $4 billion in FY 1979. With respect to monetary
policy, M-1 now is assumed to grow near the upper end of the 4 to
6-1/2 per cent range shown for alternative B in the Bluebook--
specifically at about a 6-1/4 per cent annual rate through mid-1979.
Further substantial increases in short-term interest rates continue
to be anticipated in the months ahead.1/
This month, the projection period has been extended to the
end of 1979. The projected growth of economic activity in the second
half of 1978 is still projected to average about 3-1/2 per cent,
1/ We have assumed increases in interest rates consistent with the lowend of the Federal funds rate ranges shown in Appendix I of theBluebook.
I - 5
roughly 1 percentage point less than the annual growth rate expected
for the first half of this year. Some acceleration of economic growth
is expected in the first half of 1979 in response to the tax cut, but
then expansion is projected to diminish to about a 3 per cent annual
rate in the latter half of 1979.
Growth is expected to decelerate in the next two quarters
mainly because of the anticipated decline in real outlays for resi-
dential structures as tighter mortgage market conditions begin to
curtail activity. In 1979, business spending is projected to grow
more slowly than in 1978, due to a conservative pace of inventory
accumulation and to some slowing in plant and equipment outlays. With
such sources of income growth losing momentum, growth of real consump-
tion outlays is projected to be rather moderate, averaging about 3-1/2
per cent over the six-quarter projection period; the strongest advances
are anticipated early next year as a result of the initial stimulus of
the assumed tax cut.
Given the slower rate of expansion of aggregate activity,
growth in employment over the projection horizon is projected to ease
back toward a more typical rate of around 2-1/4 per cent annually from
the unusually high 4 per cent increase over the past year. As a result,
the unemployment rate is likely to hold about level over the year ahead
and then to turn up slightly toward the end of 1979.
I - 6
The rate of inflation, as measured by the gross business
product fixed-weighted price index, is projected to average slightly
more than 7 per cent over the next six quarters. The rate of increase
in food prices is still expected to slow later this year, but there is
little prospect that the pressure of rising costs on nonfood prices will
ease in the near term. Unit labor costs are likely to continue rising
at a rapid pace as recent large price increases are expected to influence
settlements in the heavy round of wage contract negotiations that are
scheduled for next year. In addition, as was the case this year, infla-
tion is projected to accelerate somewhat in the first part of 1979 as a
consequence of further boosts in social security taxes and the minimum
wage.
Details of the staff projection are shown in the tables that
follow.
I-7
STAFF GNP PROJECTIONS
Per cent changes, annual rateGross business
product Unemploymentfixed-weighted rate
Nominal GNP Real GNP price index (per cent)6/14/78 7/11/78 6/14/78 7/11/78 6/14/78 7/11/78 6/14/78 7/11/78
8.211.610.711.0
6.618.110.810.7
8.211.610.711.211.4
7.018.810.510.8
12.0 11.710.8 10.9
10.210.1
11.1 11.4
11.5 11.7
11.1 11.0
-1.36.04.93.9
-.48.83.73.2
4.53.9
-1.36.04.94.03.9
.08.83.53.4
4.23.73.22.7
8.57.77.06.1
6.26.16.06.0
5.95.9
6.4 -1.0 -1.2
19 7 5 1/197619771/
19781979
1978-1I-
1978-111978-III1978-IV
1979-I1979-111979-III1979-IV
Change:77-11 to78-II
77-IV to78-IV
78-11 to79-1178-IV to79-IV
Memo:Growth Over78-11 to79-II
Annual Policy Period:
11.1 11.0
1/ Actual.
10.7
I-8July 12, 1978
GROSS NATIONAL PRODUCT AND RELATED ITEMS(Quarterly figures are seasonally adjusted. Expenditures and income
figures are billions of current dollars at annual rates.)
1978 1979Projected
I II III IV I II III IV
Gross national productFinal purchases
PrivateExcluding net exports
Personal consumption expendituresGoodsServices
Gross private domestic investmentResidential constructionBusiness fixed investmentChange in business inventories
Nonfarm
Net exports of goods and services 1/ExportsImports
Gov't. purchases of goods and servicesFederal 2/State and local
Gross national product inconstant (1972) dollars
Personal incomeWage and salary disbursements
Disposable personal incomeSaving rate (per cent)
Corporate profits with I.V.A. and C.C. Adj.Corporate profits before tax
Federal government surplus or deficit (-)(N.I.A. basis)High employment surplus or deficit (-)
State and local government surplus ordeficit (-) (N.I.A. basis)
Excluding social insurance funds
Civilian labor force (millions)Unemployment rate (per cent)
Nonfarm payroll employment (millions)Manufacturing
Industrial production (1967=100)Capacity utilization: all mfg. (per cent)Materials (per cent)
Housing starts, private (million units, A.R.)New autos sales, (millions, A.R.)
Domestic modelsForeign models
1995.31974.31557.71581.4
2082.92059.51632.91645.3
2135.72110.61672.01683.3
2191.42165.31712.51721.6
1282.4 1330.6 1361.8 1393.9687.8 719.5 734.4 751.5594.6 611.1 627.4 642.4
320.0100.1198.821.120.3
338.1105.1209.623.423.4
-23.7 -12.4180.5 198.7204.2 211.1
346.6105.6215.925.125.1
-11.3203.6214.9
353.8105.6222.126.126.1
-9.1214.3223.4
416.6 426.6 438.6 452.8152.7 150.0 155.2 162.7263.8 276.6 283.4 290.1
2253.02225.11762.11772.5
2311.92283.21809.61818.9
2368.62339.41854.71861.1
1438.1 1477.5 1512.3776.5 797.1 813.7661.6 680.4 698.6
362.3105.6228.827.927.9
-10.4224.2234.6
370.1105.6235.8
28.728.7
-9.3233.2242.5
378.0106.1242.729.229.2
-6.4241.5247.9
242.32396.61899.51903.5
1547.0830.4716.6
386.2107.1249.429.729.7
-4.0249.9253.9
463.0 473.6 484.7 497.1166.0 169.7 173.7 178.8297.0 303.9 311.0 318.3
1360.3 1389.3 1401.4 1413.4 1428.0 1441.2 1452.6 1462.2
1638.81058.71402.1
6.1
1693.31099.71445.2
5.5
1738.21122.01478.2
5.4
1782.01149.31513.4
5.4
1827.71183.01565.0
5.7
1873.61211.41602.7
5.4
1923.91239.31644.9
5.6
1970.91270.61638.1
5.6
126.5 147.3 154.9 160.8 156.6 162.3 165.7 168.6171.9 193.4 197.6 203.2 199.5 205.7 209.6 213.0
-55.8 -35.4 -36.3 -35.7 -38.0 -34.2 -35.8 -34.4-9.9 1.7 1.7 5.9 3.0 7.4 8.1 14.4
34.1 29.8 28.2 25.5 23.7 22.218.1 13.3 11.2 8.0 5.7 3.7
19.9 18.6.9 -.9
99.2 100.2 101.0 101.5 102.0 102.6 103.2 103.76.2 5.9 5.8 5.8 5.7 5.7 5.8 5.9
84.1 85.5 85.9 86.2 86.8 87.3 87.8 88.320.1 20.2 20.3 20.4 20.6 20.8 20.9 21.0
139.682.181.7
1.7210.738.771.96
143.683.583.8
2.052.10
10.002.10
145.283.784.1
1.8511.25
9.252.00
147.484.284.8
1.8010.808.901.90
150.084.985.7
1.7510.959.001.95
152.085.286.3
1.7010.758.901.85
153.685.386.5
1.7010.658.851.80
154.985.286.7
1.7010.558.801.75
DENTIAL - FRII FOMC
1/ Balance of payments data and details underlying these estimates are shown in the International Developmentssection of this part of the Greenbook.
2/ Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accountstable which follows.
I-9July 12, 1978
CONFIDENTIAL - FRCLASS II FOMC
PER CENT CHANGES IN GROSS NATIONAL PRODUCT
AND RELATED ITEMS
(Annual rates compounded quarterly)
1979Projected
I II III IV I II III IV
Constant (1972) dollars
Gross national productFinal purchasesPrivate
Excluding net exports
Personal consumption expendituresGoodsServices
Gross private domestic investmentResidential structuresBusiness fixed investment
Gov't. purchases of goods and servicesFederalState and local
Disposable personal income
Current dollars
Gross national product.nal purchasesPrivate
Excluding net exports
Personal consumption expendituresGoodsServices
.0 8.8 3.5 3.4-1.7 8.3 3.2 3.3-1.2 9.6 2.5 3.1-. 5 7.5 2.3 2.6
-. 9 6.2 2.6 3.0-7.2 9.1 2.2 3.4
7.3 2.8 3.2 -2.5
14.3 16.6 3.7 1.5-3.9 12.0 -6.1 -7.84.1 14.5 4.4 4.6.
-3.8 3.4 5.6 4.2-9.1 -10.6 10.5 6.8
-. 4 12.5 2.9 2.8
1.7 3.4 2.4 3.1
4.23.94.34.2
4.95.64.2
3.4-7.85.1
2.42.22.6
5.9
7.0 18.8 10.5 10.8 11.75.5 18.4 10.3 10.8 11.56.2 20.8 9.9 10.0 12.17.6 17.2 9.6 9.4 12.4
7.5 15.9 9.7 9.8 13.31.1 19.7 8.5 9.6 14.0
15.4 11.6 11.1 9.9 12.5
Gross private domestic investment 18.6 24.6 10.4 8.6 10.0Residential structures 1.8 21.5 1.9 .0 .0Business fixed investment 11.5 23.5 12.6 12.0 12.6
Gov't, purchases of goods and services 2.8 10.0 11.7 13.6 9.3Federal -2.6 -7.0 14.6 20.8 8.4State and local 6.1 20.8 10.2 9.8 9.9
Disposable personal income 10.3 12.9 9.5 9.9 14.4
Personal income 9.2 14.0 11.0 10.5 10.7Wage and salary disbursements 12.0 16.4 8.4 10.1 12.3
Corporate profits with IVA & C.C. Adj. -41.8 83.8 22.3 16.1 -10.0Corporate profits before tax -13.6 60.1 9.1 11.8 -7.1
Nonfarm payroll employment 4.5 6.6 1.9 1.7 2.6Manufacturing 6.6 3.5 1.2 2.5 4.7
Nonfarm business sectorOutput per hour -2.7 1.7 3.3 2.2 2.0Compensation per hour 13.6 8.7 7.9 8.0 12.4Unit labor costs 16.8 7.1 4.4 5.7 10.2
GiP implicit deflator 1/ 7.0 9.2 6.8 7.2 7.2Gross business product-fixed-weighted price index 2/ 6.2 9.7 7.1 6.7 7.9
Industrial production .9 12.0 4.6 6.2 7.2
3.73.53.63.3
3.83.74.0
2.7-7.8
5.0
3.24.42.4
2.5
10.910.911.210.9
11.411.011.9
8.9.0
12.8
9.59.29.6
10.0
10.410.0
15.413.1
2.33.4
3.23.23.22.7
3.02.43.7
1.7-6.14.5
3.24.02.8
4.1
10.210.210.3
9.6
9.88.6
11.1
8.81.9
12.2
9.79.89.7
11.0
11.29.5
8.67.9
2.41.8
1.9 1.78.7 8.86.7 7.0
6.9 6.77.5 6.8
5.6 4.2
2.72.62.82.5
2.72.13.3
2.0-4.3
3.9
1.8.1
2.7
2.8
10.110.110.0
9.4
9.58.5
10.7
9.03.8
11.5
10.612.3
9.7
9.6
10.110.5
7.26.6
2.31.5
1.58.87.2
7.36.9
3.6
Excluding Federal pay increases rates of change are: 1978 QI, 6.9 per cent; 1978 QIV, 6.6 per cent; 1979 QI,
7.2 per cent; 1979 QIV, 6.7 per cent.'Using expenditures in 1972 as weights.
~__11978
I - 10July 12, 1978
CONFIDENTIAL - FRLASS II FOMC
GROSS NATIONAL PRODUCT AND RELATED ITEMS(Expenditures and income figures are billions of current dollars.)
Gross national productFinal purchases
PrivateExcluding net exports
Personal consumption expendituresGoodsServices
Gross private domestic investmentResidential constructionBusiness fixed investmentChange in business inventories
Nonfarm
Net exports of goods and services 1/ExportsImports
Gov't. purchases of goods and servicesFederal 2/State and local
Gross national product inconstant (1972) dollars
Personal incomeWage and salary disbursements
Disposable personal incomeSaving rate (per cent)
Corporate profits with I.V.A. and C.C. Adj.Corporate profits before tax
Federal government surplus or deficit(N.I.A. basis)High employment surplus or deficit (-)
State and local goverment surplus ordeficit (-) (N.I.A. basis)
Excluding social insurance funds
Civilian labor force (millions)Unemployment rate (per cent)
Nonfarm payroll employment (millions)Manufacturing
Industrial production (1967=100)Capacity utilization: all manufacturing (per cent)
Materials (per cent)
Housing starts, private (million units, A.R.)New auto sales, (millions, A.R.)
Domestic modelsForeign models
1972
1171.11161.7908.6911.9
733.0410.5322.4
188.362.0
116.89.48.8
-3.372.775.9
253.1102.1151.0
1171.1
942.5633.8801.3
6.2
92.196.2
Projected1978 1979
2101.3 2339.92077.4 2311.11643.8 1831.51657.9 1839.0
1342.2 1493.7723.3 804.4618.9 689.3
339.6 374,1104.1 106.1211.6 239.223.9 28.923.7 28.9
-14.1 -7.5199.3 237.2213.4 244.7
433.6 479.6155.2 172.0278.5 307.5
1973
1306.61288.61019.11012.0
809.9457.5352.3
220.066.1
136.017.914.7
7.1101.6
94.4
269.5102.2167.3
1235.0
1052.4701.3901.7
7.8
99.1115.8
1974
1412.91404.01101.31095.3
889.6498.3391.3
214.655.1
150.68.9
10.8
6.0137.9131.9
302.7111.1191.5
1217.8
1154.9764.6984.6
7.3
83.6126.9
-17.3 -6.7 -10.7 -70.2 -54.0 -49.5 -40.8 -35.6-5.9 -.7 17.1 -20.3 -10.4 -8.7 -.2 8.2
13.75.6
86.55.6
73.719.1
119.783.188.0
2.3610.939.321.61
13.04.1
88.74.9
76.920.1
129.887.592.4
2.0511.429.651.77
7.5-2.9
91.05.6
78.420.0
129.384.287.7
1.348.917.491.42
5.9-6.2
92.68.5
77.118.3
117.873.673.6
1.168.667.081.58
18.43.9
94.87.7
79.419.0
129.880.280.4
1.5410.128.631.50
29.213.7
97.47.0
82.119.6
137.182.481.9
1.9911.139.072.06
29.412.7
100.55.9
85.420.3
144.083.483.6
1.8511.229.231.99
21.12.3
102.95.8
87.620.9
152.685.286.3
1.7110.728.891.84
I/ Balance of payments data and details underlying these estimates are shown in the International Developmentssection of this part of the Greenbook.
1 Components of purchases and total receipts and total expenditures are shown in the Federal Sector Accountstable which follows.
1975
1528.81540.31201.41181.0
980.4542.2438.2
189.151.5
149.1-11.5-15.1
20.4147.3126.9
338.9123.3215.6
1202.1
1253.4805.7
1084.47.4
99.3123.5
1976
1706.51693.11331.71323.9
1094.0601.6492.3
243.368.0
161.913.314.9
7.8162.9155.1
361.4130.1231.2
1274.7
1382.7891.8
1185.85.6
128.1156.9
1977
1889.61871.41476.41487.3
1211.2660.5550.7
294.291.0
185.118.217.1
-10.9174.7185.6
395.0145.4249.6
1337.3
1536.7990.0
1309.25.1
139.9171.7
1446.0
1899.01226.11623.9
5.6
163.3207.0
1391.1
1713.11107.41459.7
5.6
147.4191.5
I - 11
CONFIDENTIAL - FRCLASS II FOMC
PER CENT CHANGES IN GROSS NATIONAL PRODUCTAND RELATED ITEMS
July 12, 1978
Projected1972 1973 1974 1975 1976 1977 1978 1979
Constant (1972) dollars
Gross national productFinal purchases
PrivateExcluding net exports
Personal consumption expendituresGoodsServices
Gross private domestic investmentResidential structuresBusiness fixed investment
Gov't. purchases of goods and servicesFederalState and local
Disposable personal income
Current dollars
Gross national productFinal purchasesPrivate
Excluding net exports
Personal consumption expendituresGoodsServices
5.7 5.5 -1.4 -1.35.5 4.9 -.7 .26.7 6.3 -1.4 -. 37.0 5.1 -2.3 -1.0
5.9 4.7 -.9 1.96.5 5.0 -3.4 .95.3 4.4 2.3 3.0
12.9 10.0 -11.4 -22.918.8 -3.7 -24.6 -13.88.1 12.2 -. 3 -13.7
1.5 -.2 2.1 2.1-1.7 -5.4 -.8 .93.8 3.2 3.8 2.8
4.2 6.7 -1.5 1.8
10.1 11.6 8.1 8.29.9 10.9 8.9 9.7
10.3 12.2 8.0 9.111.0 11.0 8.2 7.8
9.7 10.5 9.8 10.29.5 11.4 8.9 8.89.9 9.3 11.1 12.0
Gross private domestic investment 17.7 16.8 -2.5 -11.9 28.7 20.9 15.4 10.2Residential structures 25.0 6.6 -16.6 -6.5 32.0 33.8 14.4 1.9Business fixed investment 12.2 16.4 10.7 -1.0 8.6 14.3 14.3 13.0
Gov't. purchases of goods and services 8.3 6.5 12.3 12.0 6.6 9.3 9.8 10.6Federal 6.1 .1 8.7 11.0 5.5 11.8 6.7 10.9State and local 9.8 10.8 14.5 12.6 7.2 8.0 11.6 10.4
Disposable personal income 7.9 12.5 9.2 10.1 9.4 10.4 11.5 11.3
Personal income 9.7 11.7 9.7 8.5 10.3 11.1 11.5 10.9Wage and salary disbursements 9.4 10.6 9.0 5.4 10.7 11.0 11.9 10.7
Corporate profits with IVA & C.C. Adj. 19.3 7.6 -15.6 18.8 29.0 9.1 5.4 10.8Corporate profits before tax 17.3 20.4 9.6 -2.7 27.0 9.4 11.5 8.1
Nonfarm payroll employment 3.5 4.3 2.0 -1.7 3.1 3.4 4.0 2.5Manufacturing 2.8 5.1 -.1 -8.5 3.3 3.2 3.6 2.9
Nonfarm business sectorOutput per hour 3.0 1.7 -2.9 1.6 4.1 2.2 1.1 2.1Compensation per hour 5.8 7.8 9.4 9.6 8.7 8.8 9.4 9.4Unit labor costs 2.7 6.0 12.7 7.9 4.5 6.4 8.2 7.2
GNP implicit deflator 4.1 5.9 9.7 9.6 5.3 5.5 6.9 7.1Gross business product fixed-weighted price index 1/ 3.3 5.7 10.3 9.5 5.5 5.9 6.6 7.4
Industrial production 9.2 8.4 -.4 -8.9 10.2 5.6 5.0 6.0
1/ Using expenditures in 1972 as weights.
6.04.55.66.4
6.06.94.9
22.222.93.6
.5-. 2
1.0
3.8
11.69.9
10.812.1
11.611.012.3
4.94.75.36.0
4.95.14.6
13.019.3
8.6
2.55.11.1
4.6
11.211.011.311.5
10.89.5
12.4
3.93.73.83.4
3.84.03.5
3.4-6.05.3
3.43.73.3
3.7
11.411.211.410.9
11.311.211.4
FEDERAL SECTOR ACCOUNTS(billions of dollars)
Fiscal
Year1977*
FY78e/Admin. F.R.1/ Board
FY79e/Admin. F.R. Cong.
1/ Board 2/
Unified budget receipts 3/ 357.8 401.2 400.0 448.2 448.4 447.9
Unified budget outlays 37 402.8 452.3 449.7 496.6 495.0 498.8
Surplus(+)/Deficit(-), unified
budget -45.0 -51.1 -49.7 -48.5 -46.6 -50.9
Surplus(+)/Deficit(-), off-budget
agencies 4/ -8.7 -11.0 -10.9 -12.9 -12.7 n.a.
Means of financing combined deficits:
Net borrowing from public. 53.5 54.9 53.3 62.0 59.3 n.a.
Decrease in cash operating balance -1.7 4.0 5.1 0 2.0 n.a.
Other 5/ 1.9 3.2 2.2 -0.6 -2.0 n.a.
Cash operating balance, end of period 19.1 15.1 14.0 15.1 12.0 n.a.
CY1977*
366.1417.0
CY78e/F.R.Board
412.8458.4
SI F.R. staff estimatesCalendar quarters; unadjusted data1977 1978
IV* I* II III IV
84.5 85.4 124.2 105.9 97.3113.3 111.2 110.6 114.6 122.0
-50.9 -45.6 -28.8 -25.8 13.6 -8.7 -24.7
-10.4 -10.6 -1.3
56.8 54.7 20.7--0.6 0.3 6.85.3 1.2 2.6
12.3 12.0 12.3
-3.6 -2.4 -3.6 -1.0
20.8 2.5 9.3 22.15.9 -11.1 3.5 2.02.8 -2.7 -0 5 1.6
6.4 17.5 14.0 12.0
1979I II
98.3 136 3120.5 123.7
III116.5128.8
-22.2 12.6 -12.3
-3.9
25.101.0
12.0
-3.2 -4.6
-7 50
-1 9
12.0
19 60
-2.7
12.0
Memo: Sponsored agency borrowing 6/
NIA Budget
Receipts
Expenditurespurchases (total)
Defense
Non-defenseAll other expenditures
Surplus(+)/Deficit(-)
5.2 n.a. 18.9 n.a. 12.3 n.a.
361.9-411.9140.691.848.8
271.4 ,-50.0-'
6.8 20.2 2.0 4.5 6.2 6.2 3.0 1.0 3 5 4 5
Seasonally adiusted annual rates
406.3-9
455.0
152.9100.052.9
302.1 ,-48.7-2
460.3
498.1
168.0107.2
60.8330.1-37.8
373.9423.4
145.594.351.2
278.0-49.5
423.2
464.0
155.2101.653.6308.8-40.8
386.3
446.3
153.898.555.3
292.5-60.0
395.3451.1152.799.553.2
298.4-55.8
417.4452.8
150.0100.649.4
302.8
-35.4
433.4
469.7
155.2101.6
53.6314.5-36.3
446.6
482.3
162.7104.658.1
319.6-35.7
453.8
491.8166.0
105.660.4
325 8-38.0
467.7501 9
169.7
108.161.6
332.2-34.2
480.6516.4173.7110.5
63.2342.7-35.8
High Employment Surplus(+)/Deficit(-)(NIA basis) 7/ -5.0 n.a. -7.2 n.a. 6.1 n.a. -8.7 -0.2 -22.1 -9.9 1.7 1.7 5.9 3.0 7.4 8 1
*actual e--estimated r--revised n.a.--not available p--preliminary
1/ OMB Mid-Session Review of the 1979 Budget, (July 6, 1978).2/ Congress' First Concurrent Resolution on the Budget, (May 17, 1978).3/ Adjusted for accounting change in earned income credit payments--formerly treated as income tax refunds and now classified as outlays.
4/ Includes Federal Financing Bank, Postal Service, U.S. Railway Association, Rural Electrification and Telephone Revolving fund, Housing for the Elderly or
Handicapped Fund (until October 1977), and Pension Benefit Guaranty Corporation.5/ Checks issued less checks paid, accrued items and other transactions.6/ Includes Federal Home Loan Banks, FNMA, Federal Land Banks, Federal Intermediate Credit Banks, and Banks for Cooperatives.7/ Estimated by F. R. B. staff.8/ Includes $2.5 billion of borrowing from the Federal Reserve on September 30 which was repaid October 4.
9/ Quarterly average exceeds fiscal year total by $1.7 billion for FY 1977, by $1.8 billion for FY 1978 and by $1.9 billion for FY 1979 due to spreading of
wage base effect over calendar year.
July 12, 1978
1977* 1 / Board
8/V ,
I - 13
Comments on the Fiscal Policy Outlook
This month's fiscal policy assumptions include a lower level
of Federal spending during the current quarter and the year ahead. For
fiscal year 1978, the staff now projects outlays at $450 billion, about
$2-3 billion below last month's forecast and the Administration's most
recent estimate. Higher farm prices, which encourage farmers to repay
Commodity Credit Corporation loans, are responsible for most of this
month's reduction.1/ Incoming data also suggest that spending will be
lower than expected for highway, waste treatment and Medicaid grants.
The receipts forecast remains unchanged at around $400 billion, and
the resulting deficit is now projected at $50 billion, about $11
billion below the President's January budget estimate.
Some additional spending shortfalls--perhaps $5 to $6
billion from the Administration's current forecast ($496.6 billion)--
are likely to occur once again in fiscal year 1979. These anticipated
reductions are partially offset--in the staff's forecast--by adjustments
for higher projected interest rates and for new Congressional spending
initiatives.2/ As a result, spending in fiscal year 1979, is now
expected to total around $495 billion. The receipts forecast continues
1/ These loan repayments are treated as negative outlays in the budget.2/ The Mid-Session Budget Review assumed a constant 6.5 per cent bill
rate for fiscal years 1978 and 1979.
I - 14
to assume passage of a $19 billion tax reduction (annual rate), and is
essentially unchanged from last month at $448 billion.1/ The resulting
deficit for fiscal year 1979 is now expected to be $47 billion, while
the total deficit to be financed (unified plus off-budget) is projected
at $59 billion.
Even though the expected outlay shortfalls have reduced the
deficits for fiscal years 1978 and 1979, Treasury financing requirements
are likely to be heavy during the next six months. The staff projects
that borrowing from the public will total around $9-1/2 billion in the
third quarter ($7 billion marketable and $2-1/2 billion nonmarketable)
and $22 billion in the fourth quarter ($19 billion marketable and $3
billion nonmarketable). This forecast assumes that the Treasury will
meet $5-1/2 billion of its borrowing requirements by drawing down its
large $17-1/2 billion cash balance over the remainder of calendar year
1978.
The full employment budget now shows a $13 billion shift
toward surplus between fiscal years 1978 and 1979.
1/ The staff has moved the starting date of the crude oil equalizationtax forward from October 1, 1978 to January 1, 1979 in order to beconsistent with the date assumed by the Administration in its Mid-Session Budget Review.
I - 15
DOMESTIC FINANCIAL DEVELOPMENTS
Summary. Market rates of interest have risen further since
mid-June. The Federal funds rate advanced 1/4 point to 7-3/4 per cent
immediately after the last FOMC meeting; increases for most other short-
and long-term security yields have ranged between 1/8 and 1/4 percentage
point, the major exception being the 3-month bill rate which has risen
almost 1/2 point.
M-1 expansion slowed to an annual rate of 5-1/2 per cent in
June, probably in part because of the transitory effect of a sharp rise
in Treasury cash balances at the mid-month tax date. Growth in M-2
equaled and that in M-3 slightly exceeded May's moderate rates, however,
as inflows to interest-bearing deposits included in these broader aggre-
gates picked up. At commercial banks, savings deposits declined abso-
lutely in June, but growth of time deposits other than large negotiable
CDs increased markedly. On balance, deposits subject to Regulation Q
are estimated to have grown at about the same pace as in May, suggesting
that the new 6-month certificates enabled banks to retain funds in the
face of rising market yields, but not to increase inflows. In contrast,
deposit growth at savings and loan associations and mutual savings banks
increased noticeably in June, indicating that thrift institutions were
able to use the new certificates to greater effect.
Managed liabilities of commercial banks grew moderately in
June as bank credit demand slackened; most notably, business loans
posted only a small advance following the outsized gain in May. Over
I - 16
the second quarter as a whole, however, total loans and investments
registered the largest gain since 1974, led by a 19 per cent (SAAR)
increase in business loans.
Over-all business financing demands appear to have remained
strong in June. Commercial paper issued by nonfinancial companies grew
sharply, and a record increase in finance company paper during June,
as well as continued sizable bond issuance by these firms, suggests
that growth of short- and intermediate-term business credit at finance
companies also remained substantial. Public bond offerings of non-
financial corporations in June roughly matched the moderate pace of
earlier months of 1978, while stock issuance rose more than seasonally.
Over the course of the second quarter, the ratio of short- to long-
term business debt appears to have risen a bit further, and the ratio
of liquid assets to current liabilities is estimated to have moved still
lower.
Available information indicates little, if any, abatement
recently in total household borrowing. Consumer instalment credit
expanded in May at an annual rate on the order of 20 per cent for the
third consecutive month, and data for large banks suggest continued
strength in June. Mortgage debt formation probably also was well
maintained as FNMA again acquired a large volume of loans and S&Ls
tapped the Home Loan Banks for lendable funds. S&Ls have brought their
commitment positions into somewhat more comfortable alignment with their
cash flows, and the FHLBB continues to pursue a liberal advance policy.
I - 17
Against this backdrop, there have been signs of some stabilization in
mortgage credit conditions in recent weeks; interest rates on new S&L
loan commitments have leveled off, as has the percentage of associations
reporting lendable funds in short supply. The ceiling rate on FHA/VA
home mortgages was raised 1/2 point to 9-1/2 per cent, effective June 28,
thereby cutting loan discounts to more manageable levels.
The Treasury has redeemed $5.5 billion, net, of bills since
the last FOMC meeting; however, sales of notes and bonds have offset
about half of this debt reduction and held the Treasury's cash balance
at a high level. Long-term debt offerings by State and local govern-
ments declined in June from the exceptionally high May volume, owing to
a sharp drop in advance refundings.
Outlook. Credit demands during the next few months are not
likely to be significantly stronger than during the first half of this
year. Nonetheless, declining liquidity of key lenders suggests further
upward pressures on interest rates. Such pressures may become increas-
ingly evident by the fall, when a further significant tightening of
System policy may be needed to restrain monetary expansion.
In the business sector, internal cash flows are projected to
rise during the second half of 1978 in step with the moderate growth of
inventory and fixed investment, leaving the corporate financing gap
little changed. Nonfinancial firms may fund in the bond markets some
of their short-term debt, but business loan demand probably will remain
I - 18
strong enough to place continued liquidity pressures on commercial banks.
Further firming of bank lending policies therefore may occur.
Consumer instalment credit expansion may slow a bit as
purchases of autos and other durable goods slacken from the accelerated
second quarter pace. In the mortgage market, field reports suggest
that interest rates of 10 per cent and higher are causing some potential
home buyers to hesitate, but loan demand by and large is still strong.
Thus, although the staff has raised its estimate of the effect of the
new 6-month accounts on deposit flows and this implies a little less
deterioration of S&L liquidity, mortgage rates and nonprice terms still
are likely to tighten gradually.
Federally sponsored credit agencies will remain heavy borrowers
as they provide sizable support to the residential mortgage market. The
agencies will encounter increased competition from the Treasury, reflect-
ing the seasonal swing of the Federal budget into deficit in the second
half of the year. Because it will be able to run down its high mid-year
cash balance, the Treasury is projected to raise only about $9 billion
of new cash in the third quarter; however, fourth quarter cash needs
may exceed $22 billion. State and local governments are expected to
run a smaller surplus in the second half, and their reduced acquisition
of financial assets will contribute marginally to increased credit
market pressures.
I - 19
INTERNATIONAL DEVELOPMENTS
Summary. The weighted-average exchange rate of the dollar
has fallen further by over 2 per cent in the past four weeks, continuing
the decline that began at the end of May. The average exchange value
of the dollar has fallen below its previous year low of the end of March,
and about 9 per cent below its level of last September. The renewed
exchange market pressures over the past month were most intense against
the yen, which has appreciated by 6-1/2 per cent over this period, the
Swiss franc, and the French franc; however, except for the Canadian
dollar, all other major currencies have appreciated against the dollar.
The main underlying factors depressing dollar exchange rates
over the past month were heightened concern over (a) the prospect of a
high U.S. inflation rate relative to those abroad and (b) the persistence
of extremely large Japanese and German current-account surpluses at a
time when the U.S. deficit remains high. In addition, selling pressure
on the dollar, particularly against some EC currencies, intensified in
reaction to the focus on developing closer monetary cooperation in the
EC at the July 6-7 Bremen Summit, as well as expectations that no agreement
will be reached on measures that would help to strengthen the dollar at
the July 16-17 Bonn Summit.
. The Desk occasionally entered the
market to sell small amounts of German marks and Swiss francs during
I - 20
the past month to moderate exchange-rate movements. Over the period as
a whole, the System made net purchases of over $370 million equivalent
of marks, most of which were acquired directly from the Bundesbank, enabling
the System to reduce its outstanding swap obligations to about $910 million.
The U.S. trade deficit declined in May to an annual rate of less
than $32 billion. The April-May average of less than $35 billion was
down substantially from the very high first-quarter rate of $45 billion.
The decline in the deficit in April-May reflected a relatively strong
advance in exports, particularly of agricultural goods, and a smaller
increase in imports.
Foreign official assets in the United States (excluding OPEC
holdings) increased by only $200 million in May, and preliminary estimates
indicate little further change in June. For the second quarter as a whole,
foreign official assets declined by about $2.5 billion, a significant
reversal of the large increases over the past year,
. However, in the first
ten days of July, foreign holdings at the Federal Reserve Bank of New
York increased by $700 million
OPEC banking and security holdings in the United States fell by
$1.5 billion in May. Preliminary data for June indicate a further $500
million reduction. The decline in OPEC holdings is related to a tightening
I - 21
of liquidity positions of several OPEC members. The OPEC current-account
surplus has been declining rapidly since mid-1977 as OPEC imports have
continued to rise while oil revenues initially stabilized and subsequently
declined. The OPEC current-account surplus in the first half of this
year is estimated to have been almost halved from a high level of $20
billion in the first half of 1977.
The shift to a net outflow of officially-held funds by both
OPEC and non-OPEC countries in the second quarter of 1978 was offset
by sizable net private capital inflows of private bank-reported and
securities transactions. In April-May U.S. banking offices raised about
$4.5 billion for their domestic operations from the private sector,
primarily through inflows from their foreign affiliates.
Economic expansion abroad shows little evidence of sustained
strength. Industrial production in Japan has advanced for seven consecutive
months, but only at a sluggish pace in April and May. German industrial
output figures have moved erratically, with substantial monthly advances
followed by declines. German industrial production in May remained at
the level recorded in October 1977.
Outlook. The U.S. trade deficit is expected to continue in
the range of $33-36 billion at an annual rate through the end of next
year. The staff is projecting a trade deficit of $37 billion for 1978
and $35 billion for next year. The corresponding deficits for the
current account (including net reinvested earnings) are $22 and $18
billion. (See Appendix A in Part II for description of revision of
current-account series.) We expect the following factors to continue
I - 22
influencing U.S. trade flows over the projection period: a U.S. real GNP
growth rate slightly lower than the average real GNP growth being projected
for major foreign countries; the increasing effects of the depreciation
of about 9 per cent in the average value of the dollar since the end of
last September; and effects of various U.S. and foreign government
commercial policy measures designed to influence U.S. imports and exports,
such as the "trigger price mechanism" for imported steel and Japanese
efforts to curtail the volume of selected Japanese exports to the United
States.
The staff's projection for the U.S. trade deficit over the next
six quartes envisions less of a turnaround in the U.S. trade position
than what appears to be expected by most market participants. Moreover,
we expect the trade surpluses of Germany and Japan to persist at least
for the immediate future. In addition, it appears that the U.S. inflation
rate will continue to be higher than the average rate for major foreign
countries. The staff, therefore, expects some further decline in the
value of the dollar in the months ahead.
CONFIDENTIAL (FR)CLASS II FOMC
Outlook for U.S. Net Exports and Related Items(billions of dollars, seasonally adjusted annual rates)
1978 1979P
19 7 7 r 1978P 1979P I I IP III IV
P I II III IV
1. GNP NET EXPORTS - Intl Acct. data -11.1 -14.5 -7.7 -24.0 -12.7 -11.6 -9.4 -10.7 -9.6 -6.7 -4.32. (GNP net exports - GNP Acct. data) 1/ (-10.9) (-14.1) (-7.5) (-23.7) (-12.4) (-11.3) (-9.1) (-10.4) (-9.3) (-6.4)(-4.0)
3. a) Merchandise Trade Balance -31.1 -37.3 -34.9 -44.8 -35.1 -35.2 -33.8 -36.7 -36.5 -34.3 -32.5
4. Exports (excl. military) 120.6 136.9 164.3 122.7 137.6 139.8 147.5 153.8 160.9 167.6 174.75. Agricultural 24.4 28.2 29.3 26.1 31.6 27.0 28.3 28.5 29.0 29.5 30.06. Nonagricultural 96.2 108.7 135.0 96.6 106.0 112.8 119.2 125.3 131.9 138.1 144.7
7. Imports 151.6 174.2 199.2 167.5 172.7 175.0 181.3 190.5 197.4 201.9 207.28. Petroleum and petrol. products 45.0 43.7 50.2 39.8 42,7 44.4 47.8 49.2 50.7 50.2 50.99. Nonpetroleum 106.7 130.5 149.0 127.7 130.0 130.6 133.5 141.3 146.7 151,7 156.3
10. b) Military transactions, net 2/ .9 1.5 3.1 .8 1.4 1.8 2.1 2.5 2.9 3.3 3.711. c) Investment income, net 3/ 17.3 19.5 21.7 18.2 19.2 20.1 20.4 21.4 21.6 21.8 21.912. d) Other services, net 4/ 1.7 1.8 2.4 1.7 1.7 1.8 1.9 2.1 2.4 2.5 2.6
13. U.S. CURRENT ACCOUNT BALANCE -15.2 -21.5 -18.3 -27.8 -20.2 -19.4 -18.6 -21.1 -20.2 -17.3 -14.814. a) GNP net exports (line 1.) -11.1 -14.5 -7.7 -24.0 -12.7 -11.6 -9.4 -10.7 -9.6 -6.7 -4.315. b) U.S. Govt & private transfers 5/ -4.1 -7.0 -10.6 -- 3.8 -7.5 -7.8 -9.2 -10.4 -10.6 -10.6 -10.5
Constant (1972) dollars16. Merchandise exports (excl. military) 67.0 69.5 76.7 65.7 69.9 70.0 72.4 74.2 76.0 77.5 79.117. (% change, annual rates) (0.3) (3.7) (10.3) (4.1) (28.2) (0.4) (14.8) (10.0) (10.4) (8.2) (8.2)
18. Merchandise imports 71.0 75.5 79.9 74.5 75.7 75.2 76.5 78.3 79.7 80.3 81.319. (% change, annual rates) (13.0) (6.3) (5.8) (7.4) (6.1) (-2.4) (7.0) (10.0) (7.0) (3.3) (5.3)
Foreign Outlook - Major Industrial Countries 6/20. Real GNP, % change, annual rates 3.0 3.7 4.5 4.9 4.4 4.0 4.1 5.0 4.7 4.6 4.921. Wholesale Prices, % change, A.R. 7/ 8.7 5.2 6.3 5.3 6.9 6.1 6.1 6.0 6.0 7.0 7.3
77-.1/ Differs from Intl. Acct. data (line 1) in the inclusion of revisions
and new data.2/ Excludes grants to Israel under military assistance acts and exports
financed by those grants.2/ Excludes U,S. Govt. interest payments to foreigners, and reinvested
earnings of incorporated affiliates which are included in line 15.4/ Includes travel, transportation, fees and royalties, and mis-
cellaneous other service transactions.5/ Includes U.S. Govt. grants, U.S. Govt. interest payments to
foreigners, remittances and pensions, and exports to Israel financedby U.S. military assistance grants, and reinvested earnings ofincorporated affiliates.
6/ Weighted by the shares of Canada, France, Germany, Italy, Japan and theUnited Kingdom in the sum of the real GNP of the six countries in dollarterms.
7/ Data are largely manufactured goods prices.2/ Projected.e/ Estimated.*/ Published data.
NOTE: The current account now includes reinvested earnings of incorporatedaffiliates.
July 12, 1978
